Australian company directors’ duties

July 2017

A proprietary company must have at least one director (and at least one who ordinarily resides in Australia), and a public company must have at least three directors (at least two of whom ordinarily reside in Australia).

Fiduciary duties

A director is in a fiduciary relationship with the company, which is often referred to as a relationship of trust and confidence or confidential relations.

Some of the fiduciary obligations of a company director include the duties to:

  • act in good faith in the best interest of the company;
  • act for proper corporate purposes; and
  • give adequate consideration to matters and to keep decisions unfettered.

Fiduciary duties are reinforced by section 181 of the Corporations Act 2001 (Cth) (Corporations Act) (which is discussed further below).

A breach of fiduciary duty may lead to personal liability of a director, including civil and criminal penalties, and liability for damages.

Good faith in the best interest of the company

This imposes a duty on a director not to promote his or her personal interest by making a gain in circumstances in which there is a conflict, or a possibility of conflict, between his or her personal interests and those of the company. 

This duty includes an obligation no to promote the interest of a third party where there is a conflict.

Proper corporate purposes

A director must not make improper use of his or her position or information acquired through that position to gain an advantage.

In the case of discretions afforded to directors by a contract or legislation, that power must be used in the interests of the principal rather than in the director’s own interests.

Where a director uses information acquired in the course of being a director for their own benefit rather than for the benefit of the company, a breach of this duty is likely to have occurred.

Adequate consideration and keep decisions unfettered

Directors ordinarily have many discretions conferred on them for the management of the company.

A director is required to exercise an active discretion, and will likely be breaching this duty for failing to exercise a discretion.

The board must also retain its discretions, and must not delegate a discretion without authority.

Statutory duties

Care and diligence

Under the Corporations Act, a director must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

  • were a director of a company in the company's circumstances; and
  • occupied the office held by, and had the same responsibilities within the company as, the director.

The standards imposed by the Corporations Act are similar as the standards imposed under the common law.

The ‘business judgment rule’ set outs that a director satisfies the requirements of the Corporations Act and the common law if they:

  • make the judgment in good faith for a proper purpose;
  • do not have a material personal interest in the subject matter of the judgment;
  • inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and
  • rationally believe that the judgment is in the best interests of the corporation.

A breach of this duty may lead to personal liability of a director, including civil penalties, and liability for damages.

Good faith

Under the Corporations Act, a director must exercise their powers and discharge their duties:

  • in good faith in the best interests of the corporation; and
  • for a proper purpose.

A breach of this duty may lead to personal liability of a director, including civil penalties, and liability for damages.

Use of position

Under the Corporations Act, a director must not improperly use their position to:

  • gain an advantage for themselves or someone else; or
  • cause detriment to the corporation.

A breach of this duty may lead to personal liability of a director, including civil penalties, and liability for damages.

Use of information

Under the Corporations Act, a person who obtains information from being a director must not improperly use the information to:

  • gain an advantage for themselves or someone else; or
  • cause detriment to the corporation.

A breach of this duty may lead to personal liability of a director, including civil penalties, and liability for damages.

Criminal offences

Under the Corporations Act, a director commits an offence if they are reckless or dishonest and fail to exercise their powers and discharge their duties in good faith in the best interests of the corporation or for a proper purpose.

Further, it is an offence for a director to dishonestly use their position or use information to gain an advantage for themselves or someone else, or cause detriment to the company.

A breach of these duties duty may lead to criminal penalties, including fines and terms of imprisonment.

Duty not to engage in insolvent trading

Each director has a duty to prevent the insolvent trading and to prevent the company from trading in a manner that will make it insolvent.

When a company debt is incurred, if a director is aware that, or has reasonable grounds to suspect that the company is or may become unable to pay its debts as and when they fall due, the director will be in breach of this duty.

A director will be deemed to have been aware of the company’s insolvency if a reasonable person in the position of the director would have been so aware.

A director found to be in breach of this duty could be the subject of a civil penalty application by ASIC and ASIC may also seek to obtain compensation orders on behalf of creditors.

A director may also be found criminally liable for insolvent trading.

Duty to keep proper accounts and records

A company is obliged to keep written financial records that correctly record and explain transactions, its financial position and performance.

A director must comply with this requirement and commits an offence if a contravention is dishonest.

General law duties

A director owes a duty of care and skill at common law and in equity.

Also, other general law duties may arise from contract (e.g. in the case of an employment agreement) or an equitable obligation (e.g. duty of care and diligence in equity, as distinct from a fiduciary duty).

This article contains comments of a general nature only, does not constitute legal advice and may not be relied upon as such.  This article also summarises aspects of the Corporations Act as at the date it was written and may not take into account any recent or subsequent developments in the law or regulation.  The article is not a substitute for specific professional advice.  No responsibility is accepted by Eaton Hall or the author(s) for any loss occasioned to any person doing anything as a result of anything contained in this article.